In In re Avianca Holdings S.A. v. Burnham Sterling & Company LLC et al. (In re Avianca Holdings S.A.), 127 F.4th 414 (2d Cir. 2025), the U.S. Court of Appeals for the Second Circuit resolved a split in authority and determined that an obligation first arises—and is entitled to priority—under section 365(d)(5) of the Bankruptcy Code when a payment comes due under a lease, regardless of when the payment obligations accrues. 

Background

The debtor was one of the largest Latin American airlines. Prior to its bankruptcy filing, two brokers brokered 20 aircraft leases on the debtor’s behalf. As compensation, the debtor agreed to pay the brokers a fixed fee based on a preset schedule. The fees were characterized as “additional rental payments” and were payable over the terms of the aircraft leases. 

The debtor commenced its Chapter 11 bankruptcy case. 11 U.S.C. § 365(d)(5) requires a debtor to “timely perform all of the obligations of the debtor . . . first arising from or after 60 days after the [petition date] under an unexpired lease of personal property . . . until such lease is assumed or rejected.”

Pursuant to section 365(d)(5), the debtor paid the actual lessors of the aircraft the rent due under the leases, but it did not pay the brokers the additional rental payments—the broker fees that the parties had agreed would be paid over time—that came due between 60 days after the debtor’s bankruptcy filing through the date the debtor decided to assume or reject the leases.

Over the course of the next two years after its bankruptcy filing, the debtor rejected all 20 airplane leases under which it owed the additional rental payments to the brokers.

The Parties’ Positions

The brokers filed proofs of claim and moved to compel the debtor to pay the balance due to them. The brokers argued their claims were entitled to priority treatment under section 365(d)(5) as obligations owed under an unexpired personal property lease that first arose as the payments came due under the leases’ schedules, which was at least 60 days after the petition date in each instance.  

The debtor objected and argued that the brokers were entitled only to a general unsecured claim. In particular, the debtor argued that the obligation to pay the brokers was a pre-petition obligation—not one that arose 60 days after the petition date—because all of the brokerage services were rendered pre-petition and the payment terms in the lease were “set” pre-petition.

The Bankruptcy Court Sides with the Brokers

The bankruptcy court “sided” with the brokers, granted the motion to compel and ordered the debtor to pay the brokers over $4.3 million. 

The bankruptcy court reasoned that the obligation to pay arose post-petition, holding that the “plain meaning” of section 365(d)(5) “refers to plural ‘all obligations’ of the debtor ‘arising’ under ‘a lease’ (a singular noun).” Therefore, “each separate payment requirement under ‘a’ lease constitutes a separate ‘obligation,’ not merely one portion of a singular, overarching ‘obligation’ embodied in the underlying lease document.” Thus, the debtor’s obligation to pay the brokers’ fees arose, for purposes of section 365(d)(5), on the dates specified in the schedule in the leases. 

On appeal, the district court affirmed the bankruptcy court’s ruling. 

The Second Circuit Affirms and Adopts the So-Called “Billing Approach”

The Second Circuit framed the appeal as presenting a single question: did the obligation to pay the brokers’ fee “first aris[e] from or after 60 days after [the petition date]”? 

The court observed: “[a]t first glance, the question seems straightforward, but lurking beneath the surface is a deep, pre-existing split of authority regarding the proper method for determining when a debtor’s obligation arises.”

On the one hand, the “accrual” approach—which aligned with the debtor’s position—“requires the debtor to pay only those obligations that accrued post-petition, irrespective of when those obligations come due under the operative lease.”   

On the other hand, the “billing date” approach—which the brokers advocated—“requires the debtor to pay obligations once they come due under the operative lease, regardless of when the obligation can be said to have accrued.”   

The court adopted the billing approach, holding that section 365(d)(5) requires a debtor to “perform the debtor’s contractual duties that come into being under an unexpired lease of personal property at least 60 days after the [petition date].” 

The court observed that the billing approach “recognizes the critical difference between when a creditor’s claim arises and when a debtor’s obligation arises.” In particular, while the broker’s obligation to provide brokerage services arose pre-petition, the debtor’s obligation to pay certain amounts arose post-petition. 

The court also observed that this result avoided re-imposing a showing of a post-petition benefit to the estate, which is required under section 503(b)(1) for administrative claims. Section 365(d)(5) explicitly requires priority payment of the debtor’s obligations first arising 60 days post-petition “notwithstanding section 503(b)(1) of” the Bankruptcy Code. Thus, section 365(d)(5) exempts creditors from section 503(b)(1)’s requirement of a post-petition benefit to the estate. Consequently, the brokers were not required to show a post-petition benefit to the estate for their services as a precondition to being entitled to payment under section 365(d)(5).

Takeaways

Avianca may provide an incentive for debtors to make decisions to assume or reject leases more quickly than they otherwise may have done in the past to avoid paying certain amounts to non-debtor counterparties. Under Avianca, if a debtor rejects a lease more than 60 days after the case is filed, the debtor will be liable for all amounts owed under the lease that “first aris[e]” 60 days after the petition date, even if the amounts are owed to a party other than the lessor. Future case law will tell if Avianca causes debtors to make decisions to assume or reject leases more quickly.